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Monthly Archives: April 2016

Whenever I see Bernie Sanders on TV and hear his proposals for income equality, all I can think is ‘This is what we are going to get if we don’t put something effective in place soon.’

If all I have posited in the Skim and Partial Ponzi is correct, then the road to reform comes through executive compensation. While this has long been mentioned as a solution, the overwhelming focus has been on purely reducing/cutting it, and/or nebulously tying it to some performance formula. So far any such changes have clearly not worked, as their has been a huge and continuing wealth transfer in corporate America from the 99.99% to the .01%.

So let’s take a very small step by starting with the people who determine executive pay: The Board of Directors (BOD). Being a director on a corporate board should be viewed as quasi-volunteer work. Back in the old days (pre-1980 for a number), serving on a corporate board was viewed as an honor and a responsibility. It was something a person did for altruistic purposes, to give back to the capitalist system that had served us so well.

Nowadays it is first and foremost a form of remuneration. As highlighted recently in the show ‘Billions,’ the female board member (aka Evelyn Benson) who gets ‘Axed’ from Yumtime’s board, cares most about losing her $200,000 annuity when she’s voted off the board. It was a completely offhand comment, and that’s because it’s become so ingrained in our system. Of course $200k is probably a lowball number, cut in half from the average director compensation once all the committee fees and other perks are added in. Multiply it by 3-4 boards, and I’d say that’s a pretty good way of making a million a year, especially for only 4-6 weeks of work!

Well guess what, there’s still an enormous amount of value in being on the BOD of a major corporation, net of any compensation. Continue reading →

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While politicians and other critics have focused on stock buybacks being a poor use of cash versus investing in and growing a company, they have completely missed the boat. As have those in the business press who have concentrated their critiques on the timing and high stock prices paid for these buybacks. In so doing, all these parties have provided a smokescreen for executives of publicly traded corporations to continue their Chinese water-torture plundering of American’s savings.

Instead, the real charade of stock buybacks is that they have nothing to do with the shareholder and enhancing shareholder value, and everything to do with self-remuneration, as outlined in ‘The Skim and the Partial Ponzi.’

Yet a long time ago, buybacks really were very beneficial to shareholders, as they allowed good managers to take advantage of the inefficiencies and dislocations of the capital markets. The underlying thesis behind value investing was that if a company’s ability to generate cash wasn’t recognized by the market, that excess cash could be used to buy back stock and shrink the float. If despite this buttressing, the stock price continued to languish, it could be done again and again as cash continued to pile up on a company’s balance sheet (now at an even faster rate due to the buybacks being accretive and increasingly so). The key ingredient to all this was that the price of the company had to be undervalued.1

Nowadays though, stock buybacks are done indiscriminately, and usually executed very poorly. The main reason for these “sloppy” buybacks is that they simply have to be done in order to offset dilution from employee stock and stock option awards. Leading to the question:

What would happen if all publicly traded companies stopped buying back stock altogether? Continue reading →

Sure, this is a very discretionary measure. I could just fallback and use Warren Buffett’s term of “selling for far less than intrinsic value in the stock market.” But I’d prefer to hone in on a company’s ability to generate excess cash, both currently and going forward [↩]